Masterfully Vague?

A busy day at the Department of Finance as desks get cleared before Christmas. The Department has released its regulations regarding the determination of long-term economic value for assets. These regulations formalise draft regulations that were released here in September. Much of this was published before. One new bit is that the September draft said that assets would be valued using a discount rate such that

“NAMA discount rate” means the Irish 10 year Government Bond rate at the establishment date plus * per cent;

Today’s regulations tell us what the mysterious * is:

“NAMA discount rate”, for bank assets denominated in euro, means the Irish 10-year Government Bond Irish Stock Exchange quoted closing yield at the establishment date plus 0.8 per cent;

For those unfamiliar with asset pricing formulae, the lower the discount rate used, the higher will be the estimate of the asset value. I always suspected that a low discount rate would be part of the NAMA pricing strategy. For instance, just before the draft NAMA legislation was released I wrote:

My point here is that it will be very easy for any NAMA official who wanted to do so, to pluck out an appropriate set of assumptions about the future that will end up delivering whatever haircut is deemed desirable. In particular, I suspect it is possible that the valuations will completely ignore the risk premium element in pricing these assets and will make highly positive assumptions about future cash flows.

Interestingly, the Department’s new best friend, Mr. Seelig from the IMF had suggested to the Department of Finance that they use market rates for property investments or adjust NAMA’s cost of capital to reflect the risks associated with the assets being acquired. The 0.8 percent adjustment is, by any reasonable assessment, well short of the appropriate risk adjustment.

Mr. Seelig would undoubtedly approve of the masterful vagueness of the rest of the document, which is full of stuff about NAMA taking into account “in such manner as it thinks fit, by reference to such of the following as it considers relevant” various factors, i.e. doing whatever the hell they feel like.

One bit I didn’t understand was the following. Having defined the NAMA discount rate, page 6 then states:

The standard discount rate that NAMA shall apply in the calculation of the long-term economic value of all bank assets shall be 2.75 per cent to provide for enforcement costs, and 0.25 per cent to provide for due diligence costs, incurred or likely to be incurred by NAMA over its lifetime in the discharge of its functions.

I couldn’t figure out when this rate would be applied rather than the NAMA discount rate defined above.

16 thoughts on “Masterfully Vague?”

  1. I think the latter 3.0 percent is just an off-the-top adjustment to whatever answer they get from LTEV. i.e. NAMA LTEV = LTEV * 0.97. The real action is in the NPV calculation.

  2. KW
    “I couldn’t figure out when this rate would be applied rather than the NAMA discount rate defined above.”
    When it gives a better price (better being a variable and intangible thing”) to NAMA.
    ten plus .8 or 3….. whatever. Sure its all free money from the ecb isnt it?

  3. I’m guessing Frank is right. The “standard discount rate” probably isn’t a discount rate in the sense of the earlier usage of the term in the document. What they might mean is that they will apply a three percent haircut to whatever LTEV they come up with.

  4. So, 3% of 77 bn = 2.31 bn

    As I remember it, the administration costs were going to be 350 mn/year or 3.5 bn expected over ten years?

    So it is either underpricing, or giving us a shorter lifespan of 6 and a half years?

  5. Off topic I know but Karl you did refer to desks being cleared before X-mas … I see the D/Finance is looking for a new Secretary general as a ‘vacancy will arise shortly’. Recruitment is outside TLAC and a matter for the govt. Expressions of interest to the current SG by noon on Thursday, 7 January, 2010. Any of the good contributors to this site interested ?

  6. +1 Robert….

    I haven’t been following the NAMA debate in a while…. been too busy trying to secure business for the new year; thankfully some of it will come in….

    But I had heard the masterful comment and it made me think… Now its made me laugh.

    It appears Mr Seelig and myself have a few things in common, that masterful comment was … masterful…

  7. Karl

    I was told in September by a major UK property investor that he would apply a discount rate of at least 10% to projected cashflows to NAMA, given the huge underlying uncertainties attached to these projections.

    Perhaps another approach to thinking about the appropriate discount rate to apply to NAMA cashflows is the change is the cost of borrowing to the Irish Government as a result of NAMA. This is the true cost of capital for NAMA. I know it’s empirically impossible to calculate this, but I think even the most reasonable observer will agree that it’s considerably higher than the actual average cost of borrowing used as the discount rate in the NAMA business plan.

    Andrew

  8. The IMF’s Mr. Seelig sounds like the kind of man the Irish public should prefer to keep out, rather than invite in and put in charge of something so important.

  9. Mr. Lenihan knows he is going to need the IMF next year that is what Mr. Seelig’s real use is, he knows the IMF ropes. The government are already running to keep up with bank losses next year they will see that they cannot run fast enough. They embarked on a suicidal strategy with NAMA against all independent advice. Wait till the flood of defaults hit the books next year making recapitalisation all but impossible.

    We need solvent (foreign) banks in this country and we need them now. The governments strategy of throwing good money after bad has failed miserably and in the process burned up the NPRF. Remember Morgen Kelly’s remark that if we put money into Anglo that we may as well light a fire in Stephen’s Green with it! How right Mr. Kelly was as usual. 11bn gone another 12bn to go in, property prices still falling and business failures mounting. it will be a long time before any Irish bank makes a profit of even 1bn again.

  10. .
    AIB says it may need more state money IN ADDITION TO NAMA

    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6875081/AIB-warns-it-may-need-more-state-money-despite-bad-bank-deal.html

    Our government is crazy not to pull the plug on these characters while it still can.

    Have the bankers told our Minister for Finance the true extent of their debts?
    Is the Minister aware of the true level of floating rate not debt?
    There are some incredible figures being racked up in Anglo AFTER it was nationalised.

    Other banks are also pulling in HUGE deals, even though they are bankrupt. We the taxpayers are underwriting all this paper even though we don’t have a clue what’s going on.

    What about this half a billion, for example?

    Official Notice
    Nr: 49038
    Title: AIB Allied Irish Banks, p.l.c., Dublin, Ireland
    CHF 500’000’000 Floating Rate Notes 2009-2010
    Valor-No.: 10542 883
    ISIN: CH 010 542 883 0

    In accordance with the Terms and Conditions of the Notes the
    following interest fixing has taken place:

    fixing date 23.12.2009
    period 28.12.2009 (incl.) to 29.03.2010 (excl.)
    number of days 91
    day count fraction actual / 360
    3-Mts.-CHF-Libor 0,25167
    spread + 1,25000
    new rate 1,50167 % p.a.
    amount payable CHF 379.588805 per CHF 100’000 nom.
    due 29.03.2010
    remark Adjusted Modified Following Business Day Convention

    Date: 23.12.2009
    Bank: CREDIT SUISSE AG

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